China’s balancing act

Research reports and studies
January 2016
With an estimated $4 trillion in foreign exchange reserves, the liberalisation of China’s financial system, and its currency, matters. Some of this is already held in US treasuries and foreign direct investment. China has been setting the stage for the internationalisation of the renminbi (RMB) for several years. Its inclusion in the International Monetary Fund’s basket of special drawing rights is a testament to this. However, recent volatility in China’s stock market underscores the following:

  • China’s liberalisation is a risk as the country manages an economic slowdown and financial sector deepening. Foreign capital flows will introduce new competition for unprofitable banks and corporations.
  • The effects of increases in trade and investment after full RMB internationalisation could offset the global trade slowdown, a catalyst of sharper growth slowdowns and a G20 concern.
  • Both are critical to assess the suitability of whether the RMB should sit alongside the US dollar and the euro as reserve currency and the degree to which it will surpass the US dollar in size.